Brazil’s Swap Rates Climb as Minutes Cite Persistent Inflation

Filipe Pacheco

July 24, 2014 — 5:06 PM EDTJuly 24, 2014 — 5:06 PM EDT

Brazil’s swap rates rose the most in more than four months as the central bank signaled in minutes of last week’s policy meeting that it will probably refrain from lowering borrowing costs as inflation remains above target.

Swap rates on contracts maturing in January 2017 climbed 15 basis points, or 0.15 percentage point, to 11.29 percent at the close of trade in Sao Paulo. The real declined 0.1 percent to 2.2217 per U.S. dollar.

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The central bank projected in minutes of its July 15-16 meeting published today that inflation will be “resistant in upcoming quarters” and that monetary policy needs to remain “especially vigilant.” Swap rates declined two days ago to an 11-month low as slower-than-forecast increases in consumer prices spurred some traders to speculate that Brazil would lower borrowing costs amid a stalled economy.

“The central bank made clear in the minutes that it isn’t considering changing the benchmark rate in the next few months,” Cristiano Oliveira, the chief economist at Banco Fibra SA in Sao Paulo, said in a telephone interview. “Swap rates are adjusting up because, after the minutes, a potential cut is not considered anymore.”

Policy makers voted unanimously last week to hold the target lending rate at 11 percent for a second straight meeting after nine consecutive increases to curb inflation.

While the 6.51 percent boost in consumer prices in the 12 months through mid-July was lower than the median forecast of economists surveyed by Bloomberg, the inflation rate was the highest in a year and exceeded the 6.5 percent upper limit of the official target range.

‘Slightly Hawkish’

The minutes were “slightly hawkish,” Alberto Ramos, a senior economist at Goldman Sachs Group Inc., said in a research report e-mailed today to clients. The central bank “reiterated the need to remain vigilant in order to minimize the risk that higher inflation levels persist over the relevant horizon of monetary policy,” Ramos wrote.

Speculation that President Dilma Rousseff is losing popularity as the October election approaches amid the slowest economic growth in two decades has helped push the real up 6.3 percent this year, the most among 24 emerging-market currencies tracked by Bloomberg.

A central bank survey published July 21 indicated that analysts cut their growth estimate for an eighth consecutive week, forecasting a 0.97 percent expansion of gross domestic product this year following a 2.5 percent increase in 2013.

To support the real and limit import price increases, Brazil sold $198.7 million of currency swaps today and rolled over contracts worth $346.4 million. The central bank plans to keep offering $200 million in swaps each business day at least through the end of the year.